How Google's Decision To Scrap Third-Party Cookies Will Affect The Search Giant

Alphabet Inc. GOOGL GOOG announced last week that it will do away with third-party cookies and also refrain from using any alternate identifiers to track individuals who browse across the web.

The Alphabet Analyst: Needham analyst Laura Martin has a Buy rating and $2,500 price target for Alphabet shares.

The Alphabet Thesis: Google will target a group of consumers, called federated learning of cohorts — FLoCs — rather than individuals, after the phasing out of thirty-party cookies, Martin said in a Wednesday note.

People-based identifiers are preferred by ad buyers, as it is easier to track advertising return on investment by closing the loop between ad delivery and purchase, the analyst said.

Group-based targeting like FLoCs lowers the value to ad buyers, she said. 

This solution creates value for Alphabet shareholders despite reducing net revenues by $5 billion under a worst-case scenario, Martin said. 

Yet it lowers the odds of privacy regulations and unintended consequences for revenue businesses, the analyst said. 

Related Link: French Privacy Watchdog Fines Google, Amazon $163M Over Cookie Management: Bloomberg

Alphabet's owned and operated sites such as YouTube and Google Search with first-party data represented about $125 billion in gross revenue in 2020, she said.

Google Network revenues were about $23 billion, and merely $5 billion when traffic acquisition costs are excluded, Martin said. 

"We believe GOOGL is risking its $5B (post-TAC) Network business to lower privacy regulations on its $125B of revenue from its O&O sites."  

Google's FLoCs are the best value creation decision for  shareholders, in Needham's view: in the worst-case scenario, the sell-side firm said Google will lose $5 billion in net revenue over the next five years, but it immediately lowers regulatory risk for its core first-party businesses.

GOOG Price Action: At last check, Class C Alphabet shares were down 0.28% at $2,046.97. 

Related Link: Why These Companies Could Benefit From Google's Antitrust Lawsuit